Education loans are provided by both public and private banks under the following structure:
- Loans for 4 lakhs INR or less do not require any kind of collateral by the bank.
- Loans for more than 4 lakhs INR are given by banks only upon provision of collateral by the lender.
This makes education loans accessible to a significant group of people, if not all. However, the market for education loan is inherently imperfect as it suffers from information asymmetry and adverse selection. This leads to various problems such as high interest rates, low repayment rates, lack of quality service provided by public and private banks, discrimination based on their financial background while shortlisting loan applicants, no priority given to student’s merit (education profile), among many others.